Highlights

Since the early 2000s, Georgia has embarked on a set of ambitious reforms, liberalizing the economy, emphasizing economic integration, and increasingly seeking convergence with the European Union. After a period of relative political stability, with only one change of governing party since 2004 and a broad agreement on economic policy, political polarization has been increasing.

At the start of the evaluation period, gaps persisted in infrastructure, access to finance, and innovation capacity, hampering productivity-based growth.

Georgia has provided broad access to health and education to its citizens, but quality and affordability issues persist, and skills mismatches hold back economic development.

A targeted social assistance program and pensions helped reduce poverty, but Georgia still suffers from spatial inequality. Economic activity is concentrated in major cities, and rural areas lack economic opportunities.

This Country Program Evaluation assesses the performance of the World Bank Group’s support to Georgia in achieving its development objectives during FY 2014–23. It evaluates how the Bank Group’s program has adapted over time to changing conditions and priorities and reviews the support provided by the World Bank, the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The report covers projects active during the evaluation period and is intended to inform country engagement in Georgia, and similarly situated middle-income countries with high implementation capacity, as part of the Bank Group’s Evolution Roadmap.1 The intended audience includes the Bank Group and its Board of Executive Directors, policymakers in Georgia, and other development partners. The Independent Evaluation Group (IEG) assessed the relevance, effectiveness, and adaptability of the Bank Group’s program, with a focus on three areas—private sector development, connectivity infrastructure, and human capital.

IEG finds that the Bank Group’s support was responsive to Georgia’s development challenges, evolved to ensure value addition, and provided useful diagnostics for new priority policy reforms. Support for private sector development evolved from a focus on business environment reforms to activities that supported productivity increases and economic integration. The Bank Group program on connectivity infrastructure consisted of targeted engagement in transport, with increased focus on the energy sector and information and communication technology (ICT).2 In the human capital space, World Bank analytics and engagement helped create a programmatic approach to sector financing. The Bank Group adjusted well to shocks, such as the COVID-19 pandemic, and to emerging sector issues, including imbalances in the energy sector’s financing structure.

Background and Country Context

In the early 2000s, the country embarked on a set of ambitious economic reforms, but productivity-based growth remained elusive. An ambitious reform agenda in the 2000s helped reduce corruption and increased the country’s standing in international economic rankings, resulting in sound macroeconomic management.3 The new economic model led to high annual GDP growth, averaging 5.5 percent in the 10 years leading up to 2014 (figure 1.1). However, growth was not driven by more productive firms or human capital accumulation. Although Georgia benefited from a significant volume of foreign direct investment (FDI; 8.7 percent of GDP on average between 2014 and 2022), investment was concentrated in infrastructure, real estate, and financial services.

During the evaluation period, reform progress began to stall in some areas. Georgia has seen continued improvements in some dimensions of the Worldwide Governance Indicators4 since 2014, but progress in other areas, such as the rule of law and accountability, was partially reversed (figure 1.2). The country’s Business Confidence Index has shown a slightly declining trend (figure 1.3).

Figure 1.1. Development GDP Growth and GDP per Capita, 2011–22

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Figure 1.1. Development GDP Growth and GDP per Capita, 2011–22

Source: World Development Indicators (database).

Figure 1.2. Worldwide Governance Indicators by Component, 2014–22

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Figure 1.2. Worldwide Governance Indicators by Component, 2014–22

Source: Worldwide Governance Indicators (database).

Figure 1.3. Business Confidence in Georgia

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Figure 1.3. Business Confidence in Georgia

Source: ISET Policy Institute (February 19, 2024).

Note: Q = quarter.

Georgia has had only one change of the governing party since 2004, and there has been broad continuity in economic policy. Georgian Dream won the 2012 election against the United National Movement, but continued to implement the reform agenda, although with an increased focus on social spending. In recent years, political polarization has been increasing in the country. Civil society organizations have identified issues, including state capture by the elite and an erosion of democratic norms (Transparency International 2019). This has contributed to an increasing lack of confidence in the judicial sector. The European Commission’s 2022 recommendation to give Georgia a perspective to become a European Union (EU) member included 12 priorities, such as addressing the issue of political polarization, strengthening institutions, implementing judicial reform, reducing the influence of vested interests in politics, guaranteeing media freedom, and fighting organized crime (European Commission 2022b).

The country’s geographical location has been a source of increased instability in the past two decades. An armed conflict with the Russian Federation in 2008 led to the temporary classification of Georgia as a fragile and conflict-affected state between 2010 and 2012 and resulted in more than 200,000 internally displaced persons (more than 5 percent of the total population). As a result, 20 percent of the country (Abkhazia and Tskhinvali / South Ossetia regions of Georgia) is not controlled by the government of Georgia. In 2022, Russia’s invasion of Ukraine led to an influx of migrants, with more than 168,000 Russians, Ukrainians, and Belarussians settling in the country (equivalent to 4 percent of the population).

Georgia’s focus on regional integration became an important driver for economic convergence. The limited domestic market size required a focus on economic integration. Alignment with the EU’s acquis communautaire (the body of EU legislation covering convergence) presented an opportunity to benefit from economic convergence (Gill and Raiser 2012). Georgia participated in the European Neighbourhood Policy, which included the implementation of an action plan for political and economic reform (agreed on in 2006). The country signed the Deep and Comprehensive Free Trade Area agreement with the EU in 2014, which came into force in 2016. Georgia submitted a formal application for EU membership in March 2022, and on December 14, 2023, the European Council decided to grant Georgia the EU candidate status.

At the start of the evaluation period, access to finance in Georgia was limited, as was the private sector’s ability to innovate and attract productivity-increasing foreign investments. Limited competition in a highly concentrated banking system, combined with the low reach of the nonbank financial sector and underdeveloped capital markets, has contributed to a shortage of stable, long-term funding for the private sector (IMF 2021). Georgian firms were lagging in adopting sophisticated digital technology that could have boosted productivity (Baller et al. 2016; World Bank 2022a). The business environment has benefited from various waves of reforms, but there is a lack of confidence in the judicial sector’s capacity to adjudicate promptly, with some business disputes lingering in the court system for years.

Georgians had good access to health and education, but affordability and quality challenges lingered. In 2013, Georgia introduced the universal health coverage (UHC) program, which aims to provide universal access and relies to a large degree on private service delivery. The rollout resulted in cost overruns for the government, with reimbursement caps making it less affordable for citizens. In 2014, education enrollment rates in Georgia were similar to those in peer countries in the region, with gaps in preprimary and tertiary education, especially in rural areas. The country invested 30 percent below the regional figures in education (2.8 percent of GDP). As a result, Georgia suffered from a lack of technical and generalized skills. These skills gaps weighed on productivity, firm growth, and the ability to create well-paying jobs. Skills mismatch caused 38 percent of workers with tertiary education to work in lower-paying semiskilled occupations, and the unemployment rate among those with tertiary education was above average.

The country had a history of spatial inequality, with economic activity concentrated in major cities and rural areas lacking economic opportunities. Employment in rural areas has been concentrated in low-productivity agriculture—a sector that accounted for 46 percent of all jobs at the start of the evaluation period (World Bank 2024b). An unfinished land reform with widespread absence of formal land titles presented an obstacle to the creation of more productive agribusinesses. As a result, Georgia has been unable to capture the full benefit of agricultural exports, which accounted for the largest share of total exports during the evaluation period. A lack of transport and ICT infrastructure also held back Georgia’s tourism potential outside of the main cities.

Georgia reduced absolute poverty through social transfers, but labor market opportunities remained limited. At the start of the evaluation period, unemployment amounted to about 15 percent, with a Gini coefficient of 37.6 (World Bank 2014b). The targeted social assistance program and the pension system helped reduce extreme poverty, but a lack of labor market opportunities was threatening the sustainability of poverty eradication efforts. The national poverty rate declined from 23.5 percent in 2014 to 15.6 percent in 2022 after a temporary increase in the aftermath of COVID-19.

Evaluation Framework

IEG used a multitiered theory-based contribution analysis framework to assess the overall relevance of the Bank Group’s program to Georgia’s development challenges and its contributions to three interlinked outcome areas, including its coherence with the activities of other development partners. On the level of outcome areas, the evaluation traced the status of the analytic underpinnings at the start of the evaluation period and their evolution throughout. This included building thematic theories of change based on a review of (i) how analytics translated into strategy; (ii) how strategy informed project selection and design; (iii) whether supported reforms were in line with analytics and strategy; (iv) how successfully advisory, investment, and Program-for-Results (PforR) projects were implemented and whether implementation appropriately adjusted to changing circumstances; (v) whether projects and reforms delivered results as intended; and (vi) whether delivery of results could be linked to higher-order results at the country level. For more details, see appendix A.

This evaluation includes a detailed review of thematic areas that focus on support to private sector–led development, including enabling conditions such as infrastructure and human capital. They were selected because of their relevance to the development needs of Georgia and the Bank Group’s role in the selected sectors.